What is market making?

Put, market making is the process of actively buying from an investor and selling to another, thereby providing market liquidity. The market maker can be an individual day trader or a brokerage firm that facilitates order flow on the exchange. Market making helps to keep the digital assets alive and productive.

Market makers have been misunderstood and bashed but they actually help every stakeholder on the market. Market making goes beyond merely manipulating the market. A market maker helps to adjust the price of a digital asset in order to balance the demand and supply on the market. This helps to establish some level of sanity on the unregulated cryptocurrency market. Market makers, therefore, enable every buyer and seller to achieve their goals by either buying or selling quickly. This keeps the tractions flowing on the asset that is being traded. The constant volume attracts more traders and this volume means more liquidity.

How market makers profit

Market makers are risk takers – but their risks are well informed and calculated and not mere trial and error. The difference between the bid and ask prices is referred to as the spread. A market maker seeks to tighten the spread on the exchange in order to reduce transactional costs thereby maximizing on their gains. The downside of this approach is the profits made are not very significant per trade. However, most market makers take huge position sizes and make several trades in a day so the profits eventually add up.

Market makers can afford to take huge risks because they often have diversified portfolios of cryptocurrencies and they work hard to maintain spreads on each of these. In addition to this, automated tools are now very inexpensive and they can use such tools to maintain the spreads across the board. Obviously, these tools are usually monitored by a human being. A skilled market maker will invest in both human capital and technological tools to ensure they meet their market making obligations.

With thousands of available digital assets and counting, the market maker must not bank on their financial muscle alone but also rely on technical prowess and experience. Technical expertise is what helps any trader to adhere to good risk management practices and it also helps the trader t have realistic expectations. Most novice traders take uncalculated risks that end up costing them a lot – although this expensive route often creates some good market makers.

The market maker should not be as misunderstood and hated as they often are on Twitter and other social channels. If it were not for the market makers, there would be liquidity on the thousands of digital assets on your favorite exchange. The spreads on the order books would be too huge to risk opening trades. Market makers make it possible for any person to trade digital assets at any amount and any time without necessarily incurring unnecessary losses that are characteristic of order books with large spreads. Since cryptocurrencies are the future of currencies, market makers are the future of trading.